London Interbank Mean Rate (LIMEAN)

What Is the London Interbank Mean Rate (LIMEAN)?

The London Interbank Mean Rate (LIMEAN) is the midmarket rate in the London interbank market, which is calculated by averaging the offer rate (LIBOR) and the bid rate (LIBID). The LIBOR is the rate at which funds are sold in the market, while the LIBID is the rate at which the funds are purchased in the market. LIMEAN addresses the midmarket value of the two rates. In any case, the whole LIBOR system is scheduled to be phased out by 2023 and supplanted with different benchmarks, for example, the Sterling Overnight Index Average (SONIA).

Grasping LIMEAN

The LIMEAN rate can be utilized by institutions borrowing and lending money in the interbank market, rather than depending on the LIBID or LIBOR rates in any lending agreements. It can likewise be utilized to gain understanding into the average rate at which money is being borrowed and loaned in the interbank market. Since there is a bid-offer spread among LIBID and LIBOR, LIMEAN is a reference rate that can be valuable when a single averaged rate is fitting.

The abbreviation LIBID addresses the bid rate that banks will pay for eurocurrency deposits and other banks' unsecured funds in the London interbank market. Eurocurrency deposits allude to money as bank deposits of a currency outside that currency's responsible country. They might be of any currency in any country. The most common currency deposited as eurocurrency is the U.S. dollar. For instance, assume U.S. dollars are deposited in any bank outside the United States. In that case, the deposit is alluded to as an eurocurrency.

LIBOR and LIBID are both calculated and distributed daily. Be that as it may, dissimilar to LIBID, which has no formal correspondent responsible for fixing it, LIBOR is set and distributed daily by 6:55 a.m. Eastern Time (11:55 a.m. in London) by the ICE Benchmark Administration (IBA).

A portion of the products utilizing LIBOR are adjustable-rate mortgages (ARMs). In periods of stable or declining interest rates, LIBOR ARMs can be attractive options for homebuyers. These mortgages have no negative amortization and, generally speaking, offer fair rates for prepayment. The regular LIBOR ARM is indexed to the half year LIBOR rate plus 2% to 3%.

Limitations of the LIMEAN Rate: The LIBOR Scandal

In 2008, financial institutions were blamed for fixing the London Interbank Offered Rate. The LIBOR scandal included bankers from different financial institutions giving information on the interest rates they would use to ascertain LIBOR. Evidence recommends that this collusion had been active since something like 2005, possibly sooner than 2003.

Evidence purportedly showed traders transparently requesting that others set rates at a specific amount so a position would be productive. Regulators in both the United States and the United Kingdom demanded some $9 billion in fines on banks associated with the scandal and brought criminal charges.

Features

• The whole LIBOR system, including LIMEAN, is scheduled to be phased out by 2023 and supplanted with different benchmarks.
• LIMEAN is calculated as the average of LIBOR and LIBID, the offer and bid rates on short-term funds in the London interbank market.
• LIMEAN is a benchmark reference for interest rates in the London interbank market.